Q2 2023 Surgery Partners Inc Earnings Call
Good morning, and welcome to the surgery partners second quarter 2023 earnings Conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star and Seattle on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Dave Doherty CFO .
Please go ahead.
Good morning, My name is Dave Doherty CFO of surgery partners and I'm here with our CEO , Eric Evans in our executive Chairman Wayne debate.
Thank you for joining us for our second quarter 2023 earnings announcements.
During our call we will make forward looking statements. There are risk factors that could cause future results to be materially different from these statements. These risk factors are described in this morning's press release and the reports we filed with the SEC each of which are available on our website at surgery Partners' dotcom and <unk>.
Company does not undertake any duty to update these forward looking statements and.
In addition, we will reference certain financial measures that are considered non-GAAP , which we believe can be useful in evaluating our performance. The presentation of this information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
Measures are reconciled to the most applicable GAAP measure in this morning's press release with that I'll turn the call over to Wayne Wayne.
Thank you Dave Good morning, and thank you all for joining us today.
We're pleased to report another quarter of strong top line revenue of $667 6 million and adjusted EBITDA of 100.2 million, both of which exceeded our expectations inclusive of the cyber headwinds that occurred in the quarter.
Before we dive into our financial results I want to remind everyone that in late May a few of our facilities in Idaho were impacted by a cyber event.
Out of an abundance of caution we immediately enacted a well rehearsed business continuity plan designed to help protect our patients key stakeholders and the integrity of our I T environment Vista.
Deliberate process was completed within the month of June and all activities in these facilities have returned to normal.
At the event, we continue to safely care for patients, albeit with capacity constraints associated with downtime protocols.
Team's proactive reaction mitigated the impact, which we estimate to have reduced revenue by approximately 8 million well.
While we anticipate insurance recoveries, our financial highlights related to consolidated revenue margins and seem to Saudi metrics are inclusive of this $8 million revenue headwind.
Despite the impact of the cyber headwind, both our revenue and adjusted EBITDA exceeded our expectations for the quarter. Some highlights net revenue was $667 6 million nearly eight 5% more than the prior year same facility revenue growth of eight 3%. We estimate same facility revenue growth would have grown approximately 10.
Normalizing for the impact of the event I just described.
Adjusted EBITDA was $100 2 million, representing 16, 4% growth year over year adjusted.
Adjusted EBITDA margins improved 100 basis points over the prior year and 150 basis points sequentially to 15%.
For our consolidated and unconsolidated facilities, we performed over 155020, 3000, surgical cases, respectively, representing case growth of 5% over the prior year.
Our surgical case growth continued to show resilience in both the pandemic and macro inflationary environment.
Since 2019, our same facility cases have posted a three 2% growth per year.
Finally, we deployed approximately 60 million acquiring ownership interest in new and existing facilities opened one new de Novo and announced a new three way partnership with Methodist Health system.
And our pipeline for each of these development areas remains robust tariff will provide more detail in his remarks.
We continue to be pleased with our balanced approach to growth with all pillars of our long term growth algorithm, either exceeding or meeting our expectations.
Just on the strength of our second quarter results and our continued positive outlook related to our numerous investments in the business. We are raising our full year adjusted EBITDA guidance to greater than $435 million and are maintaining our revenue outlook of at least $2 75 billion.
This refreshed outlook is inclusive of the impact related to the cyber event Dave.
Dave will discuss our guidance in more detail later in the call with that let me turn the call over to Eric to highlight some of our operational initiatives and recent investment activities Eric.
Thanks, Wayne and good morning, everyone.
Consistent and predictable growth has defined our performance over the past five years and these trends continue with our second quarter results.
From an operational perspective, our specialty case mix is right, where we expected it to be and volume was in line with our expectations with over 155000 consolidated surgical cases in the quarter. Despite the disruption in our Idaho falls facilities.
Our non consolidated facilities, which are an increasing part of our portfolio slightly exceeded our expectations with over 23000 cases.
Since 2019, each of our specialties and subspecialties have experienced growth consistent with or exceeding our long term growth expectations.
But a finer point on this since early 2022, all of our specialties recover from the pandemic with strong growth rates throughout the year.
In the quarter, our same facility growth was two 3% when compared to the second quarter of 2022 and net revenue growth per case was five 8%.
Adjusting for the disruption in Idaho Falls, our same facility case volume was approximately 3% and same facility revenue was approximately 10%.
No. We did not have any unusual factors affecting last year or this year's case volume or mix other than the previously discussed Cyprus.
We expect to consider continue to see both volume and rate growth in excess of our long term guidance algorithm through 2023 due to the strength of our physician recruiting and case mix.
On the recruiting front, our various initiatives continue to drive strong year over year growth fueling growth and M. S. K procedures, particularly total joint cases in our <unk>. We performed approximately 26000 orthopedic procedures this quarter and the volume of total joint surgeries that shifted into our ASC has increased by 73%.
We do not expect this shift to these orthopedic and eventually cardiac procedures, just slow down and we will continue to position our portfolio to take advantage of this high growth opportunity.
Finally, labor and supply cost remains well under control, resulting in a 15% adjusted EBITDA margin in the quarter, which is 100 basis points of expansion compared to the prior year.
Moving to capital deployment in the second quarter, we deployed $60 million acquiring minority ownership interest in three facilities as we entered our third new strategic health system partnership this year to develop and manage new ways ASC is in the north, Texas market and increasing our ownership position in two other facilities.
These acquisitions, which increase our multi specialty capacity at an average purchase price multiple of less than eight times trailing 12 months earnings.
This brings our year to date acquisition spend to $119 million.
We are rapidly integrating these acquisitions into our operations and expect to yield further earnings from our operating system synergies in the first 12 to 18 months post acquisition.
We remain committed to our annual capital deployment goal of at least 200 million plus the proceeds of any divestiture activity.
The strength of our pipeline, we are confident we will meet or exceed this target.
On the de Novo front since 2019, we have opened seven new ASC facilities and expect to have at least 15 additional de Novo has come online in the next 18 months.
Many of these projects are slated to open in late 2023 or early 2024.
These facilities include both consolidated majority on partnerships as well as minority interest unconsolidated partnerships.
They include a mixture of two way partnerships under development between us and physician partners and three way partnerships with our new health system partners.
We expect the pipeline to grow significantly over the next few years gave will shed more light on how we think about the financial performance of these unconsolidated facilities in his remarks, but needless to say our growth in this area increases confidence in our long term mid teens growth expectations.
Year to date, we have divested our interest in five facilities and expect to divest two to four additional facilities in the next six to 12 months.
We fully anticipate that the aggregate proceeds from these divestitures will be redeployed at a lower multiple and will be accretive to future earnings.
Finally, we announced this morning.
Third strategic partnership with a health system Methodist Health system in Dallas, Texas as I mentioned earlier in conjunction with this partnership we acquired minority interests in three of Memphis existing surgical facilities, which we will all also now managed similar to the partnership with Inner Mountain Health and Ohio Health, We announced last quarter. We will work best is to acquire <unk>.
Develop new E. S sees in the fast growing DFW metroplex capitalizing on our strong reputation and relationships that so this is earned in north Texas. We are working diligently with the development teams of all three of our new health system partners to identify and diligence new partnership opportunities. These facilities have the potential to deliver robust growth.
Over future earnings from acquisitions involving a minority interest will be reflected in equity earnings of unconsolidated affiliates, rather than consolidated revenue and expenses.
Decades of growth remain in our core business of two way J B's and surgeons surgery partners has emerged as a partner of choice for hospital systems revisiting their outpatient strategy.
We're winning in this area because we are differentiated in our ability to consistently drive same store facility growth through data enabled physician recruiting a rigorous and disciplined approach to facility management, including labor and supply cost and more recently, our proven de novo capabilities at scale.
Our deep operational excellence stands out.
As our results demonstrate our company has been built to capture the significant shift inside of care that used the U S is experiencing and together with our partners, we remain well positioned to deliver on our commitment of long term mid teens growth.
With that said I will turn the call over to Dave to provide additional color on our financial results as well as our 2023 outlook Dave.
Thanks, Eric My initial remarks will focus on our second quarter financial results before providing additional perspective on how we evaluate the performance of our full portfolio of consolidated and unconsolidated partnerships and the outlook for the remainder of the year.
Starting with the top line, we performed over 155000 surgical cases in the second quarter, which was 4.1% more than the prior year second quarter.
Our only cases that are included in our consolidated revenue. If I include cases performed in non consolidated facilities. We performed over 178000 cases, representing 5% year over year growth.
These cases spanned across all of our specialties with an increasing focus on higher acuity procedures, which is reflected in our double digit same facility growth this quarter.
The combined case growth in higher acuity specialties specific managed care actions and the continued impact of acquisitions supported revenue growth of eight 5% over the prior year. This growth was accomplished despite an $8 million impact associated with the cyber event and approximately $22 million of headwinds associated.
Shattered with divested facilities.
As Erik highlighted an increasing share of recent acquisitions include minority interest investments, which has been difficult for some of our stakeholders to model correctly as the revenue of these investments is not included in our consolidated financial results.
We benefit from growth in equity earnings, but it is difficult for many to assess the revenue associated with these earnings and the impact of our execution model.
To add clarity the second quarter revenue of the minority interest partnerships that is not reflected in consolidated revenue was $91 million.
Which was 32% higher than last year.
Given the prior year acquisitions in such investments and our continued development and acquisitions of minority interest Stakes, we expect growth in this revenue to accelerate over the next 12 to 18 months.
Which will correspond to an increase in equity earnings and affiliates and our results. We will continue to be agnostic to the accounting treatment of the assets. We acquire our focus remains to acquire a high growth high quality assets aligned with our targeted specialties at highly accretive multiples.
On a same facility basis total revenue increased eight 3% in the second quarter with case broke a two 3%.
Net revenue per case was five 8% higher than last year, primarily driven by higher acuity procedures. If we adjust these statistics for the estimated impact of the cyber headwind total revenue would have increased approximately 10%.
We believe our second quarters of both 2022, and 2023 were stable periods with no unusual events, such as backlogs spikes in certain procedures or other factors that would affect our year over year comparison.
Adjusted EBITDA was $100 $2 million for the second quarter, giving us a margin of 15% at 100 basis point improvement over last year and in line with our expectations with continued margin expansion.
Inflationary pressures related to labor and supply costs have moderated this year and we have not seen a resurgence in COVID-19 or other widescale illnesses, but we will remain vigilant in monitoring these factors across our portfolio.
The cost of salaries wages and benefits as well as our medical supplies cost as a percentage of revenue were lower than the prior periods.
As we noted in the past, we expect to produce at least $140 million of free cash flow in 2023.
In the second quarter, we generated free cash flow of approximately $8 million, which was impacted by the delayed billing and collections related to the cyber event that Wayne mentioned.
We do expect those billings to be caught up in the second half of the year. There were no. Other unusual items that affected this metric and we remain confident in the ability to meet our target of at least $140 million in 2023.
We ended the quarter with $177 $4 million in consolidated cash and an untapped revolver of $546 million.
When combined with the free cash flow, we are generating we believe our current and future liquidity positions us well in this macroeconomic environment, while giving us flexibility to maintain our long term acquisition posture of deploying at least $200 million per year for M&A.
As a reminder, our corporate debt is less than $1 9 billion with an average fixed interest rate of six 8%.
Our second quarter ratio of total net debt to EBITDA as calculated under our credit agreement was four two times.
With the earnings growth. We expect we are confident this ratio will decline over the year.
As we disclosed last quarter, we periodically divest of some of our facilities as part of our ongoing portfolio management efforts much like acquisition activity. The timing of these divestitures is difficult to predict.
The timing of the divestitures completed year to date created a revenue headwind of over $100 million for 2023 prior to any redeployment of proceeds received as noted we also experienced the nonrecurring revenue hit in the second quarter related to the cyber incident that is not projected to fully recover that.
Being said based on the strength of our second quarter results and a refreshed outlook for the remainder of the year. We are reaffirming our full year revenue guide of greater than $275 billion, while the timing of divestiture and acquisition activity is a challenge to predict we believe our 2023 full year outlook reflects the <unk>.
<unk> you.
Carrying the momentum of our second quarter results, we remain optimistic and confident about the company's growth and are raising our outlook for 2023, adjusted EBITA, so greater than $435 million, representing at least 14% growth compared to 2022.
As a reminder, our business has a natural seasonal pattern largely driven by annual deductibles resetting for commercial payers that tend to skew our results lower in the second quarter and higher than the fourth relatively speaking.
We continue to anticipate the seasonal pattern of our results will be consistent with 2022 with third quarter adjusted EBITDA to be approximately 24% and revenue to be approximately 24% of our full year guidance.
Our second quarter results speak to the strength of our operations and our business model and we believe that the balance of the year should continue to capitalize on that momentum.
With that I'd like to turn the call back over to the operator for questions operator.
Thank you.
Ladies and gentlemen, we will now be conducting a question and answer session.
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Ladies and gentlemen, we will wait for a moment, while we poll for questions.
Our first question comes from the line of Jason <unk> with Citigroup. Please go ahead.
Great. Good morning, Thanks for taking my questions. Just first start on a quick numbers question do you have that six and a half million add back to adjusted EBITDA to account for the cyber security and divestitures I guess, what's the split between cyber and divestitures in that number and I guess, a little confuse them. How divestitures are accounted for in your guidance, you've given commentary for $100 million revenue headwind.
And there's been no implied add back on divestitures from the first quarter, just any help there around the treatment of that would be great. Thanks.
Thanks.
Yes. Thanks, Jason appreciate the question, it's Dave here.
So taking that in order.
I would say a majority of that $65 million is the estimated impact of the cyber event that we had up in <unk>.
Idaho and just as a reminder, as Wayne mentioned.
That's predominantly all self contained within the second quarter more specifically in the month of June .
So.
Kind of onetime in nature.
And something that we do expect in future periods to recover a large majority of it not all of it through our cyber insurance coverage.
Sits out there, but accounting requires us to.
Wait until that becomes recognized Sui we.
We put that out of adjusted earnings just to create some consistency.
And.
The balance related to divested facilities is really the spillover of.
Of any earnings that happened post divestiture.
So there's a little bit of that that occurred inside the second quarter is not something that we expect to continue to recur yes.
Yes, Jason just to make sure we're clear our topline includes all divestitures and as we've always said, our bottomline does as well, but as Dave highlighted we actually did add some small gain post those closing that we do not include in our run rate and we actually bifurcate that I'll put that below the line.
Got it okay helpful. There and maybe just a follow up to your commentary on free cash flow of the 30 million you've done year to date, obviously seasonality to consider with a typically strong fourth quarter, but can you just again walk us through the cash flow dynamics.
For the rest of the year the trajectory of getting to that 140 million of free cash flow just because of the types of trials such a strong ramp just any more color commentary around that would be helpful.
Yeah, Yeah, yeah, absolutely and again, thanks for that question.
This is the first year that the company has turned into a free cash flow positive.
Company, we're very proud of that and it's still sitting behind our guide of $140 million.
As we talked about in the first quarter, we did expect that to ramp consistently over the course of the year partially.
Due to contributions from prior acquisitions.
And from normal seasonality in the absence of any unusual events are any unusual predictable events I guess I could say that we've had in years past.
And the benefit of our retirement.
Nearly 800, nearly $600 million instead at the end of the year last year, which generated $40 million.
The additional cash flow on lower interest rate payments.
The unfortunate reality is we did experience at Ciber invented and again as Wayne mentioned, we took steps on a proactive basis to kind of protect the.
The organization to protect.
Ah patients et cetera, and one of the side effects of that is.
As a delay in billing and processing.
Receipts as you can imagine trying to be as a protective as necessary in order to do so we believe that created a headwind for us of approximately $20 million of cash coming into the organization.
That.
That's just timing and our view that is again, if we're back and fully up and running.
At the end of June .
We expect all of those billings and the receipt of those billings to catch up for us inside the third and maybe a little bit into the fourth quarter.
So our steady slow ramp up will benefit by a little bit of that timing issue between second and third quarter and again, we remain.
I'm very confident in our ability to have $140 million of free cash flow this year and the trajectory of that gives us over the next few years.
To continue to kind of grow into a.
200 million position in a couple of years.
Yeah.
Got it great. Thank you.
Thank you.
Our next question comes from the line of Kevin Fischbeck with Bank of America. Please go ahead.
Kevin Your line is on mute for Marvin if you cannot argue formula in that as well.
Sorry.
Let's see so it sounds like Youre doing a lot more of the the joint ventures I was wondering you talked about buying assets at less than eight times you guys talked about.
Synergies in bringing those pro forma valuations done over time is there a different that we should be thinking about when some things within a JV versus something that is not within a JV is there more opportunity on those assets.
Hey, Kevin Good morning. This is Wayne on the way we look at it means generally when you're buying a minority interests. The multiple is slightly more attractive than when you're buying a majority interest.
That being said in our case. We also then take over management. So unlike typical minority interest situations, where you have more of a passive role we take a very active role in that we will only do those investments. If we were also been taking over management of the facilities and so the real value create for us on the synergies is twofold. One is that we will get the.
The synergies that we bring to the entity that we have a minority interest and will participate in those based on not only our ownership, but we will also get a management fee for those facilities, but in addition, the scale and volume of those minority interest investments will then get a laid across our broader book. So if you think about procurement or other items and how it really influences our.
Really to get synergies.
With even more scale and as you know the three partners that we are now and start are quite substantial in scale and.
And have a unique footprint. So as you think about synergies it should allow us across our broader footprint, albeit through the minority investment to really have a positive influence on those synergies as well over time, and then future acquisitions as well.
Okay, and then just to make sure that I understand the.
The adjustment that youre, making for the cyber event to the same store revenue number my assumption was that was really a volume delta. If we just took kind of your pro forma and you reported the delta would be in the volume category is that right I wasn't sure, though if your slowdown in a mate meant that some of it was going to show up in revenue per case.
Okay Kevin.
So the math behind that would suggest its bulk case and a little bit of rate as well. If you just kind of think about the nature of that facility up in Idaho. It is a surgical hospitals and acute care hospital, so youre going to get some higher acuity procedures and so on balance bringing those back into the fold is going to have an incremental.
Benefit, especially the momentum that we're carrying going into.
But the month of June in that facility, so a little bit of both that you see in that number but.
As you can see from the adjustment that we provided or the estimate that we provided it is a pretty big case impact that would push that to three closer to three.
Okay, Alright, perfect. Thank you.
Hum.
Thank you.
Our next question comes from the line of Gavin Tayloe Pavon. Please go ahead.
Yeah.
Hey, good morning, Thanks for taking the question I wanted to go to the unconsolidated centers for a moment I know in your.
Commentary talk about wanting to make investments we generate the highest return and obviously that has impact on how the street.
Modeling consolidated revenue et cetera that the non consolidated revenues up 30%.
Talk to us a little bit about why the equity income is relatively flat in the quarter year over year.
Year to date I'm sure that that's because some of the facilities or.
Newly ramping but is there any way to sort of give us some insight into those 33 on consolidated centers now like how many are <unk>.
Profitable how many are older than two years old or some sort of metric that would give us a sense of what we shouldn't be looking for that equity income line can do.
In the back half or into 2024.
Yeah, Yeah. So.
So youre absolutely right the revenue impact that we're starting to see is from the ramp up thats occurring in those J P and Missouri as a reminder, Gary last year.
A quarter of our acquisition spend related to minority interest owners.
Minority interest Stakes.
And many of those were in the de Novo state or in the early kind of ramp up state a lot of those we opened up in the beginning last year and as you noted in the second quarter here, we opened up two more and those will continue to kind of add value to us and youll see that as those things ramp up over a year from start to.
Finished zero to 24 months kind of ramp up sometimes a little bit accelerated with our health system partners.
So you'll start to see those.
Turn into an equity earnings perspective relative to the earnings growth that we see in there.
And I believe over the future as we kind of look at this because youre absolutely right.
The modeling of that growth on revenue, we feel good about it because this is Wayne was kind of alluding to we look at the.
The full P&L kind of associated with these lease facilities and we look for the growth in those jv's to be.
As strong as the rest of our consolidated book of business for the reasons that we mentioned the scale of operations and in the provision of management services that we do.
Inside here, so youre going to see revenue kind of continued to grow at a pretty decent clip, we expect that that.
30% growth that we saw inside the second quarter year over year to accelerate as we go through the balance of the year and that will turn into earnings.
Earnings growth as we go forward I do believe we made this pretty clear when we were talking about last year's results and as as we talked about first quarter acquisitions that involve minority interest stakes that there was going to be a bit of a ramp up that we see inside there and particularly with our health system partners as those as those start.
And we will see kind of a marginal benefit inside 2023, with the bigger ramp going into 2024.
Yes, Gary I think you hone in on an important point.
Folks, we do not bifurcate out the <unk>.
Start up of our de Novo those are included in our adjusted EBITDA, meaning that when you. Initially opened these things they are not profitable they ramp up fairly quickly over time, then to a run rate profitability within 12 months and then of course, you start to get the real incremental lift thereafter, so maybe one of the things we can do prospectively since we have so many new de novo is coming out of it for them.
A little more.
Clarity around how those are ramping but we are actually very very very confident in our outlook and our and in our long term double digit mid teens growth rate yeah. One other thing.
Gary that I just mentioned, we can tax we can talk about this a little bit more offline, but kind of the.
<unk>.
The nuances of the accounting for equity method investments as opposed to our adjusted EBITDA.
Would be somewhat burdened by the adjustments to EBITDA.
Appreciate your amortization interest costs, all factor into equity or anything. So it has an odd effect of depressing that number a little bit.
So kind of a goofy way the accounting kind of Chris.
[laughter] EBITDA construct.
My last question would be on the on the cyber attack. So by July one everything.
Both operationally and <unk>.
<unk> revenue cycle back to normal.
That correct.
Obviously reflected in the guidance you just gave us in terms of the breakdown, but is the third quarter at all weighed upon by that event or it was back to normal by July one.
Hey, good morning. Thanks for that question, Yeah, I wanted to start us off by saying how proud I am of the team and the work we did to really kind of isolate that event and keep it within the month of June yes by July one we are fully back up and functional now I'll say on the revenue cycle side, there's some catch up there.
As Dave mentioned, we expect to get most of that shortfall in cash, which we estimate to be $20 million in Q3, maybe going a little into Q4.
But the reality of it is the market reacted really quickly no reputation will issues and we're able to get fully back functional by July the first the team put an incredible amount of work, both locally and corporate and.
We are we learned a lot from those events, we think it was well handled but this is the world. We live in a day right and we'll have to make sure. We're increasingly prepared and we feel like we are just really proud of the team's efforts there to make sure that this is a one time kind of blip and moving forward. We feel that market is actually going to continue its usual strong performance.
Thank you.
Thank you.
Our next question is from the line of Brian <unk> with Jefferies. Please go ahead.
Hey, good morning, guys.
I guess my first question is I think about the growth algorithm I hear you reiterating that mid teens EBITDA growth outlook, maybe if we can just walk through looking at roughly 3% same store volume here is this the right way to think about organic growth and then maybe how do you bridge us to that mid teens number.
The go forward basis.
Hey, Brian Good morning, Yeah, I would say nothing's deviated from the historical algorithm just to remind you that 2% to 3% in volume and 2% to 3% in rates. We continue to expect to be at the high end of the volume range, meaning three or north of that and we because of our acuity mix and targeting the <unk>.
Higher dollar contribution procedures, we expect to be well north of the two to three on the revenue side. So we continue to believe we will be upper single digit same store over time.
If you then migrate to the $200 million of capital deployment in a year. If you assume an 88 times multiple and using a mid year convention that translates to another.
4% to 5% growth that you would add to that upper single digits and then if you look at the margin expansion continuing on the trends. It is the margin is a combination of two factors one being the synergies. We then get on the on the acquisitions, which of course as you know we don't model when we buy them. We know what they are but we don't we don't include them in our pro forma.
And so we look at those things we've got to go get and then and of course, it's the synergies across the broader book that we get with our scale and we said that that over time contribute 3% to 5% to EBITDA. So if you just do a kind of the basics of the math you end up on the low end around 12% and up on the high end around 17% and over the previous five years, we've done 18%.
AGR.
And we continue to expect to be within that range and again, we would we would say more mid teens feels very doable, especially with our de novo's and three way JV.
I appreciate it I appreciate it that way, maybe one follow up to that.
Comment earlier from Dave on the de Novo ramp.
As we think about it in the comments from Wayne about synergies being realized from previous acquisitions, though.
As I think about 2020 for should we be thinking about that growth algorithm holding as well given that obviously youre, adding 15 de novo is over the next 18 months.
Yeah, I would see that but you're you're modeling might actually show it up coming through in different scenarios right it'll come through in that margin expansion column that Wayne was just referring to.
Where you'll see that obviously, we would try to we're trying to show you kind of that overall impact of where it comes from but because of the accounting nuance of those non consolidated <unk> youre not going to see that on the revenue side. So you might have historically thought about that 2% to 3% 2% to 3%.
Algorithm kind of showing through as all topline, but in reality because of these minority interest investments. Some of that is just going to come through equity earnings of affiliates.
Brian I would also remind all of our shareholders.
We strongly believe in performance at the board of directors level and all of our senior management is tied to three year CAGR growth rates that are in the teens and mid teens to achieve optimal.
Performance and compensation. So we are not deviating from those plans and.
That will continue to be our basis. So I see no reason, we will deviate from our mid teens growth going into next year.
Yeah.
Thank you.
Ladies and gentlemen, if you wish to ask a question Please press star and one.
Our next question comes from the line of Whit Mayo with Leerink partners. Please go ahead.
Hey, Thanks, we've made it.
Deep into the call. It any talk about anesthesia can you guys. Maybe just talk about some of the changes in anesthesia coverage any pain points with the physician groups you are working with any <unk>.
Increased subsidies disruption just.
Somebody documented challenges in the market just be curious on your perspective.
Hey, Wayne.
Thanks for the question Yeah, we didn't make it along without talking about anesthesia, but I'd say why is that a good topic right now as you would you cover clearly there's pressure in the markets and in multiple markets across the country. We've got we are very it's a small minority of facilities that require any type of subsidy.
But we have a lot of discussions around how do we how do we manage our facilities more efficiently to work with our anesthesia to try to maximize that we talk a lot about strategy around staffing and wait you can imagine with our national footprint to one of our jobs as the manager is to make sure that we're using our national scale and size.
To work with the variety of anesthesia providers to minimize or eliminate the need for subsidies I mean, we're blessed in our space compared to you know some traditional acute care I would say that you know in general.
Space that anesthesia does a little bit better historically.
In surgical hospitals, where what the acute assistance would try to use to get rid of subsidies in the hospital level, obviously pressures have made that harder. We so far have had pretty good success in working through that we are in the middle of thinking through larger strategies across the country to leverage our size and scale, but it is a real pressure. It's one that we take into account as we think about our <unk>.
And one that we think we can manage quite well and so far have.
When you say size and scale I, just want to make sure that I'm thinking of this right is it thinking about how your contract differently at a at a national level or regional level or is there a different strategy that you are sort of exploring internally.
Yeah, No that's right I think when you think about it as looking at our portfolio right. So obviously with anesthesia and the ASC World in general they still do quite well in our world.
But there are pressure points that sometimes don't match up with our economics, the way anesthesia billing and reimbursement works and so the idea here is how do we how do we put a portfolio together that works for an anesthesia provider, but also eliminates or mitigates, our risk and pressure and that's a combination of using our national scale, but also.
Making sure that we're working with them in a very cheap based way to drive efficiencies.
Okay last question just around the.
The accelerating de Novo activity. It really stands out can you maybe spend a minute talking about some of the organizational changes that you've made to develop that muscle that maybe support the growth is just a little bit different than the model. A few years ago, just wanted to hear some around the investments in the people that support visibility around sustaining that.
Yeah. That's a great question, we have over the past four years spin on a journey of building out great teams to help us with our M&A platform. The traditional M&A agents and working quite well as you know for a long time, we feel good about how how well we integrate those assets how quickly we can bring them on did you novo muscle is a relatively new one for the company I mean, I would point out.
We had a new hospital in Idaho falls, we've done some rebuilds of investments, but clearly not the scale. We've been at so we didn't we didn't we brought in a lot of talent people with deep experience and to de Novo World. We've built out a very dedicated team to help with that.
It's driven and what's nice about our de Novo platform as it's a mixture of independents novo's, we we go out and get together and also with the health system partnerships renewed at numbers I'd also point out when we I think I've asked him to discuss before one of the things we like about the de Novo World is that it does position us with payers in a way that we're not talking about trend where.
Talking about value creation, and these de novo's allow us to kind of reset those conversations and we get a.
Fairly we get fair fair rates from the get go there and really feel good about how much growth that's going to drive in the future. So we built out a team there we certainly see it as just another leg to our stool, but it is a bit different.
One other item on the de Novo is just one of the things we'd like to do is Derisked. These investments.
For our investors and so before we started de Novo we fully syndicate. These so in this case, we've already recruited the doctors we've entered into syndication with the doctors, we know the volume that they will bring over and so it's one of the really encouraging things. So when you hear about where we are at in the de Novo kind of pipeline of things no debt. When we start talking about it de novo. It is because we are at.
The syndicated level now and breaking ground level. It is not like the startup what's built something and they will come it's quite the opposite it's that we've already we've already had them com. We know the volume and now we're breaking ground and then we just overlay our chassis of recruiting new free agents to the facility that are not syndicated owners and overlaying, our procurement and Rev cycle and the vast majority of these are.
Our orthopedic or visit a cardiology went as well. So these are all really really structured around the growth.
In the right areas that we've been focused on so super excited about that as a new leg to the stool, we feel very well prepared to execute.
Okay. Thanks, guys.
Okay.
Thank you.
Question comes from Lisa Gill with Jpmorgan. Please go ahead.
Hi, Thanks, very much good morning, I just want to go back to your comments around there is no backlog or a spike in procedures and I'm, just really trying to square that away as to how to think about utilization going forward. I think you also commented that this real shift inside of care joint procedures up 73%. So is that what this is is that we're really finally.
Seeing this absolute shift inside of care would be my first question is to how to think about the volume going forward and then secondly, when I think you made the comment when you were talking about the different components of growth. When we really think about the rate and so as I think about the difference between mix and contracting with managed care going forward, how do I think.
Those two variables on a go forward basis, when we think about growth.
Hey, Lisa Thanks for the question, let me unpack this a little bit let me start first and foremost with your last question is as we think about rate.
Pure rate ignoring acuity, we generally think about rate with a 2% to 3% lens and we generally view that as our book being say 50, 50, Medicare versus commercial and so if you think about it in the simplest sense of just the math of it we generally assume closer to 1% for Medicare is what we assume obviously, we continued to do better than that with CMS and the new <unk>.
Hoelzel would imply much better than that and then we generally assume something in the 4% to 5% on commercial and so as you kind of take the average of averages you end up in that 2% to 3% blended rate. So some of the outperformance as you know is really we're just getting better rates from Medicare and on the commercial front and then the Delta really becomes the acuity mix. So if you think about the most simplistic asps.
At the algorithm I would anchor on the two to three being purely just the rate of Medicare and commercial.
Second thing I would say is to.
To your question about about site of care and the shifts.
One of the reasons, we highlighted our compound growth rate since 2019 is to show that it's just been a slow and steady for us like it's never been kind of a backlog or a spike or anything like that clearly after the initial year and Covid and 2020. When volumes went went negative for most you saw that initially happened in early 2021, but the reality is.
We don't really think there's been a spike in fact things have trended exactly as we would've expected, we just slightly better on the minority interest in the quarter than we expected on the volume and candidly we were at expectations with the cyber events I had the cyber event not impacted as we would have been slightly above expectations, but clearly not at the level of what I would call related to any kind of <unk>.
Macro occurrence out there.
And then I think Dave anything you want to add or Hurricanes, you want to add yeah, and I mean, you had mentioned it worth though I mean, we think there is still quite a ways to go there and that's the right side of care. Clearly you are still seeing that in total joints, but I don't think thats a backlog that's a movement where those cases are being done. We continue to you know go earn those cases in the market.
And again ill reiterate what Duane said, which is we have stayed open and has consistent growth since 19 year over year, we expect that to continue so from our perspective in our book of physicians.
We believe we've kept up quite well now even with that we've had strong case growth. This year and that's just based on the natural organic run rate. We do expect that to continue we expect to continue to add new physicians and continue.
More procedures to the best site of care when it comes to value and so that is that's been pretty consistent the ortho. The ortho growth was fantastic, obviously won't stay at 70% forever, but theres a lot of a lot of opportunity for us to continue to move cases, and that's even before we get the next round of cardiology.
Dave anything you want to add yes, I mean reiterate that consistency.
A shift in the total joint procedures and I think we said earlier north of 70% year over year growth.
Relatively consistent with what we saw in the first quarter that that trend.
It has not stopped it has not really slowed down it's still a very upward trajectory.
And so nothing unusual.
And we noted inside the second quarter.
Great. Thanks for the comments.
Thank you ladies and gentlemen that was the last question I will now hand, the conference over to Eric Evans CEO for closing comments.
Thank you and thank you everyone for joining us. This morning, as we conclude I would like to reiterate just how proud I am of our results. So far in 2023 and the work of our 12000 colleagues and nearly 5000 physicians.
They're working contributions allow us to deliver a consistent and predictable results that will support sustained growth for all of our stakeholders and to continue to serve our communities with the highest clinical care and a lower cost setting with convenience and professionalism that our facilities are known to provide we are humbled with the privilege to serve over 600000 patients annually in what are often.
Most vulnerable moments everyday I remind you that all of our talented team members and partners are delivering on our mission to enhance patient quality of life through partnership. Thanks, So much for joining our call today and have a great rest of the day.
Thank you the conference I'll fill charity partners has now concluded. Thank you for your participation you may now disconnect your lines.
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